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Vertical Integration and Efficiency: an application to the Italian Machine Tool Industry

  • Fabio Pieri
  • Enrico Zaninotto

    ()

    (DISA, Faculty of Economics, Trento University)

This paper analyzes the relationship between firm efficiency and vertical integration in the Italian machine tool (MT) industry. A theoretical model of entry and competition within an industry has been set up. In this model firms can choose either to be vertically integrated or not: the most efficientfirms self-select in being vertically integrated, while less efficientfirms prefer a disintegrated structure and they both coexist in equilibrium. In the second part of the paper the relationship between efficiency and vertical integration has been tested using a stochastic frontier framework in an novel panel dataset including around 500 MT builders. The theoretical prediction is confirmed: outsourcing seems a rational choice for less efficient firms to make positive operating profits and stay in the market; on the other hand, more efficient firms exploit their efficiency advantage to control a greater part of the production chain, possibly benefiting from greater coordination among different phases and tailored intermediate inputs.

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Paper provided by Department of Computer and Management Sciences, University of Trento, Italy in its series DISA Working Papers with number 1006.

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Length: 42 pages
Date of creation: Nov 2010
Date of revision: 24 Nov 2010
Handle: RePEc:trt:disawp:1006
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